It wasn't the guidance that Walmart (WMT 1.02%) shareholders were hoping to see. But the retailer's fiscal fourth quarter was strong enough to keep its stock in the black during Tuesday's otherwise bearish, post-report action.
Perhaps the most encouraging aspect from the company's Q4 earnings report, however, is one that few investors are talking about -- Walmart finally cleared out a nagging inventory overhang. While this took a sizable bite out of gross margins, the world's biggest brick-and-mortar retailer can now move forward without the encumberment that's been in its way for a little over a year.
But first things first.
Worth the hit
For the three-month span ended in January, Walmart turned $164 billion worth of sales into gross profits of $38.6 billion and net operating income of a little less than $5.6 billion. The top line was up 7.4% year over year; yet, the bottom line fell 5.5%.
It's not soaring administrative, selling, or operational costs that took the biggest toll on the company's potential bottom-line growth, though. Rather, the rising relative costs of the inventory it sold last quarter -- typically categorized as the cost of sales or cost of goods sold -- outpaced revenue growth with an 8.6% expansion of its own.
In other words, Walmart did much more discounting in Q4 than it normally might to generate that sales growth.
The end result is, of course, weaker gross profits -- relatively speaking. Although last quarter's absolute gross profits of $38.6 billion is a record, it was also a stunningly low-margin quarter. Only 23.7% of its revenue was left over after accounting for the cost of the merchandise sold during Q4. That's also a multi-year record. The graphic below puts things in perspective.
Source data: Walmart. Chart by author. Gross profits are in billions of dollars.
There's an important upside to last quarter's poor profitability, however. That is, last quarter's inventory-to-sales ratio of 34.8% is the lowest it's been since the middle of 2021.
Data source: Walmart. Chart by author. Sales and inventory figures are in millions of dollars.
There's still room for a bit more improvement. Historically speaking, Walmart ends January with inventory levels that are just a tad above 30% of the January quarter's revenue. The company is still slightly above that mark. It's promising progress all the same, though.
A bigger deal than you might think
It doesn't seem particularly important on the surface. After all, if Walmart doesn't sell merchandise now, it will just sell it later, right? The retailing business isn't quite so simple, however. Much of Walmart's merchandise is seasonal. It's difficult to sell winter coats in the summer, and it's tough to sell swimwear in winter.
It's possible to stow and store some seasonal goods. The longer inventory lingers in a stockroom or at a warehouse, though, the more likely it is to be lost, stolen, or damaged. It's far more cost-effective to simply sell an item after putting it on a store shelf even if that means marking it down.
There's also the issue of a limited amount of funding available to procure fresh goods when money is effectively tied up on store shelves. This isn't to suggest Walmart's vendors are worried about not getting paid, or that the company can't get credit if and when it needs it.
But broadly speaking, that's generally not what retailers prefer to do. Profit margins in this business are already paper-thin, with a mere 2% (on average) of Walmart's revenue typically being turned into net profits. If the company needs to borrow just to buy inventory, profits can be pinched to nearly non-existent levels.
Walmart could easily top guidance
Walmart isn't home free, mind you. Although its inventory position is improving, it's still facing competitive threats from the likes of Amazon, a weakening economy, and inflation. It will need to remain smart about how it handles these challenges even if a so-so economy actually works in favor of the value-oriented store chain.
At least this one glaring, underappreciated problem is being contained. Going forward, Walmart has the funds and space it needs to procure merchandise that's marketable right now. That's a big deal. It's so big, in fact, that the retailer's guidance for full-year sales growth of between 2.5% and 3% may somewhat understate what's actually in the cards.
